Lenders, GSEs Promote REO Repurchase Loans With a Kick

Incentive-based efforts to sell foreclosed properties especially if the homes are vacant or abandoned are accelerating this year. A bank-owned property for sale in a blighted neighborhood is most people’s nightmare as much as a low-interest, no-downpayment mortgage is everyone’s dream. It may take an incentive-based financing option to marry the two.

In Detroit it is also taking a megabank, the collaboration of the city, the building power of community development corporations and the willingness of some very unique citizens to make that happen.JPMorgan Chase will grant $1 million in downpayment assistance as an incentive to police officers and city employees in Detroit who agree to purchase vacant homes and return to the city over the next two years.

The effort aims to address neighborhood revitalization issues around the city by simultaneously assisting its workforce and eliminating blight.

The incentive is especially significant for the first 10 Detroit police officers willing to purchase a vacant home. These first buyers will receive $25,000 in downpayment assistance, while an additional 60 police officers and city employees will receive up to $15,000 or equal to up to 20% of the home’s purchase price.

The downpayment grant will be forgiven within five years at 20% every year the homebuyer uses the property as a primary residence.

Qualifying criteria include earnings that do not surpass 120%-150% of the area median income, complete homeownership counseling through a partner of the Community Development Corp., a vacant home in the designated neighborhoods and a closed mortgage.

The city is supporting the initiative through its Detroit Works Project. The grant is earmarked for properties located in the neighborhoods that participate in the Project 14 and Detroit Works Project’s demonstration neighborhoods of North End, Boston Edison, Virginia Park, Southwest and Hubbard Farms. An information hotline will provide detailed information to all interested buyers.

A Chase spokesperson told this publication the first interested buyer from the police department came forward as the initiative was launched in the Boston Edison neighborhood. It involves a historic property that will be rehabilitated by Central Detroit Christian, one of the participating Community Development Corporations that may receive additional funding to complete the renovation.

Once most renovations are completed the CCC will assess related costs and determine the selling price of the property, which will be announced after the property has been completely rehabilitated and is ready for use.The quality of the renovation is key to the sale since—up to that point and until the future homeowner closes on the loan—the buyer does not have any final obligations toward the property.

The large inventory is a pressing incentive for most lenders and servicers to create vehicles that help liquidate REOs--including Fannie Mae and Freddie Mac.

By year-end 2010 Fannie was authorizing lenders to offer the HomePath program designed to solely sell Fannie Mae REOs. To qualify buyers do not need to have perfect credit, can put down as little as 3% of the property price, which can be personal savings, grants from family, friends, nonprofits and even an employer, and may have a loan to value of 97%. The program is available to both individual buyers and investors.

Also, HUD’s National Community Stabilization Trust “First Look” program gives participating buyers priority access to REO properties before they are more broadly listed for sale. It offers a streamline acquisition process, funding in accordance to HUD guidelines and a competitive price.

Recently, the Obama administration suggested a plan that facilitates the sale of vacant or abandoned properties owned by Fannie and Freddie, and rental options on Federal Housing Administration REOs promoting a pro-con debate.

The National Association of Customer Bankruptcy Attorneys opposed the idea and introduced another program that may be more helpful to those who lose their home.NACBA’s “Principal Paydown Plan” is an innovative solution because it offers the opportunity to restructure the mortgage based on bankruptcy leniency benefits.

The Principal Paydown Plan would enable a distressed homeowner to use a Chapter 13 bankruptcy to restructure the mortgage by allowing the borrower to “immediately start paying down the loan principal and reduce negative equity” by reducing the interest rate to zero for five years.

At the end of the five-year period the borrower would be able to originate a new 25-year loan at the current Freddie Mac survey rate and “amortize the remaining balance of the principal.”